Friday charts: Creative optimism

This year’s Nobel Prize in Economics was awarded to optimism. 

Formally, half the prize went to Joel Mokyr “for having identified the prerequisites for sustained growth through technological progress,” and half went to Philippe Aghion and Peter Howitt “for the theory of sustained growth through creative destruction.”

Informally, I’d argue the whole prize went to the shared belief that made the three economists share the award: the essential role of optimism in human progress.

Mokyr, an economic historian, described how a “culture of growth” born in the Enlightenment — the idea that knowledge and innovation could improve the human condition — sparked the Industrial Revolution and the two centuries of economic progress that followed.

Aghion and Howitt formalized this by building a mathematical model of Joseph Schumpeter’s “creative destruction,” demonstrating in equations how innovation drives economic growth through the continual renewal of technologies, firms and ideas.

All three prize winners recognize that this process can be terrifying.

But economic progress depends on confronting that fear with what Aghion and Howitt call “an optimism of the will” — a collective resolve to accept loss and upheaval as the price of moving forward.

In other words, progress begins with an optimistic belief that it’s possible.

“Believing that it’s possible for things to get better encourages people to try new things,” Mokyr explained.

And trying new things is how things get better: “Economic growth is driven by technological progress,” Howitt added. “Technological progress comes from new inventions and innovations.”

By jointly awarding the Nobel to Mokyr, Aghion and Howitt, the Royal Swedish Academy of Sciences recognized that embracing innovation — “for the first time in history” — is what lifted “vast numbers of people out of poverty” over the last 200 years “and laid the foundation of our prosperity.”

There’s no guarantee the happy trend will continue.

Even Mokyr, the historian of economic optimism, is himself not particularly optimistic.

“The forces opposing technological progress have been stronger than those striving for changes,” he warned, adding that progress is not the norm: “The study of technological progress is therefore a study of exceptionalism.”

Aghion doesn’t sound too optimistic about optimism, either: “Openness is a driver to growth,” he told reporters after winning the Nobel. “I see dark clouds accumulating, pushing for barriers to trade.”

Nor was Joseph Schumpeter, who warned that the creative destruction necessary for economic progress would one day erode the faith that enabled it.

But has the world ever embraced creative destruction as eagerly as it is now?

Tech companies, governments and investors are going all-in on artificial intelligence, planning to spend trillions of dollars developing a technology that could, in theory, do all of today’s jobs.

This might be viewed as a wildly optimistic bet on creative destruction: a belief that, however many jobs AI destroys, many more will be created in the process.

But it might also be a wildly pessimistic one: a belief that the only way to survive in the future will be to own a stake in the super-intelligent AI now being built.

Whatever the motivations, Mokyr’s history of the Enlightenment seems reassuring: The Industrial Revolution was built on a new belief that intelligent people could build a better future — so why not think intelligent machines can, too? And faster!

Two hundred years of evidence argues in favor of optimism.

Asked about the predictions of technology causing widespread unemployment, the newly crowned Nobel Laureate Philippe Aghion replied simply: “It never happens.”

Let’s check the charts.

The return on optimism:

If the purple line were a stock, everyone would be clamoring to buy it. Since 1800, the US GDP per capita is up 2,150% in real, inflation-adjusted terms. Joel Mokyr attributes the slower growth in the rest of the world in large part to the widespread reluctance to embrace change.

The creative destruction of poverty:

The share of the world’s population living in extreme poverty has fallen from above 80% in 1820 to less than 10% now.

It’s not about the money:

In announcing this year’s Nobel Prize in economics, the Royal Swedish Academy of Sciences included this infographic to simply demonstrate that economic growth is what makes life materially better.

Also from the Academy:

In economic terms, very little changed prior to the Enlightenment. How different was life in Rome in the year zero from life in London in 1800? Other than the weather, not very.

Creative destruction in a picture (1):

In explaining this year's award, the Academy included these charts from Aghion as evidence that established firms are forced to innovate in order to “escape competition” from younger firms: labor productivity (the y-axis) is higher where competition, as measured by company turnover (the x-axis), is higher.

Creative destruction is positively correlated to GDP growth:

This chart from (French-speaking) Aghion shows that higher turnover in jobs and companies (the x-axis) is at least correlated with higher GDP growth.

Out with the old!

This chart, also from Aghion, illustrates that economies with a higher share of young firms see stronger employment growth despite (and probably because) those firms have higher failure rates.

It’s, of course, terrible when a company shuts down and people lose their jobs. I wouldn’t wish that on anyone — not a cold-calling salesman, or a Duke basketball player, even.

But, “progress is never calm,” Aghion explained. “It thrives on disruption, creativity, and courage.”

Let’s hope we have the courage to thrive despite whatever change is coming.

Have a great weekend, optimistic readers.

(You, too, pessimistic ones.)

— Byron Gilliam

_{Brought to you by:}

Arkham is a crypto exchange and a blockchain analytics platform that lets you look inside the wallets of the best crypto traders — and then act on that information.

Arkham’s Intel Platform has a suite of features including real-time alerts, customizable dashboards, a transaction visualization tool, and advanced transaction filtering — all of which is accessible on all major blockchain networks, and completely free.

Arkham’s main product is the exchange, where users can express their trade ideas against the market.